| Business Description and Summary of Significant Accounting Policies | (1) Business Description and Summary of Significant Accounting Policies Business Description The accompanying
consolidated financial statements include the accounts of Xtant Medical Holdings, Inc., formerly known as Bacterin International
Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc., a Delaware corporation, Bacterin
International, Inc., (“Bacterin”) a Nevada corporation and X-Spine Systems, Inc. (“X-spine”), an Ohio corporation,
(Xtant Medical Inc., Bacterin and X-spine are jointly referred to herein as “Xtant” or the “Company”).
All intercompany balances and transactions have been eliminated in consolidation. Xtant products serve the combined specialized
needs of orthopedic and neurological surgeons, including orthobiologics for the promotion of bone healing, implants and instrumentation
for the treatment of spinal disease, tissue grafts for the treatment of orthopedic disorders to promote healing following spine,
cranial and foot surgeries and the development, manufacturing and sale of medical devices for use in orthopedic spinal surgeries. The markets in which
the Company competes are highly competitive and rapidly changing. Significant technological advances, changes in customer requirements,
or the emergence of competitive products with new capabilities or technologies could adversely affect the Company’s operating
results. The Company’s business could be harmed by a decline in demand for, or in the prices of, its products or as a result
of, among other factors, any change in pricing or distribution methods, increased price competition, changes in government regulations
or a failure by the Company to keep up with technological change. Further, a decline in available donors could have an adverse
impact on our business. As described in
more detail below, effective as of February 13, 2018, the Company effected a 1-for-12 reverse split of its common stock (the “Reverse
Stock Split”). The Reverse Stock Split is reflected in the share amounts in all periods presented in this report. At December 31,
2018, the Company had cash on hand balances of $6.8 million, and accumulated deficit of $215 million and has incurred significant
losses in the current and prior periods. Management’s
evaluation of going concern was conducted as part of the multiple discussions with the Xtant Board of Directors’ review of
the Annual Operating Plan. The Company and OrbiMed have entered into a Second Amended and Restated Credit Agreement and
commitment for up to an additional $10 million in debt capital. Management believes these actions along with the $16.7 million
of cash and accounts receivable on the balance sheet as of December 31, 2018 will enable the Company to continue as a going concern
through the end of March 2020. Corporate Restructuring Restructuring Agreement On January 11, 2018,
we entered into a Restructuring and Exchange Agreement (the “Restructuring Agreement”) with ROS Acquisition Offshore
LP, OrbiMed Royalty Opportunities II, LP (collectively referred to herein as the “Investors”), Bruce Fund, Inc., Park
West Partners International, Limited (“PWPI”), Park West Investors Master Fund, Limited (“PWIMF”), and
Telemetry Securities, L.L.C., and with the Investors, are collectively referred to herein as the “Holders”. Pursuant to the
Restructuring Agreement, and following the execution of the Sixth Amendment to the 2017 Notes, described in the “Debt”
and “Equity” sections below, on January 17, 2018, the Investors converted the 6.00% convertible senior unsecured notes
due 2021, plus accrued and unpaid interest, at the $9.11 per share conversion rate originally provided thereunder (the “2017
Notes”), into 189,645 shares of our common stock. On February 14,
2018, after giving effect to the Reverse Stock Split (described below), $70.3 million aggregate principal amount of our then outstanding
6.00% convertible senior unsecured notes due 2021 held by the Holders (the “Remaining Notes”), plus accrued and unpaid
interest, were exchanged for newly-issued shares of our common stock at an exchange rate of 138.8889 shares per $1,000 principal
amount of the Remaining Notes, for an exchange price of $7.20 per share (the “Notes Exchange”). This resulted in the
issuance of 10,401,309 shares of our common stock to the Holders and the Investors acquiring an approximately 70% controlling interest
in our outstanding shares of common stock. Upon the completion of the Notes Exchange, all outstanding obligations under our convertible
senior secured notes were satisfied in full and the Indentures governing such notes were discharged. Pursuant to the
terms of the Restructuring Agreement, we commenced a rights offering to allow our stockholders as of April 27, 2018 record date
to purchase up to an aggregate of 1,137,515 shares of our common stock at a subscription price of $7.20 per share. The rights offering
expired on June 18, 2018. We issued 129 shares of common stock in the rights offering and received $0.9 thousand gross proceeds. Amended and Restated Certificate
of Incorporation On February 13,
2018, following a special meeting of our stockholders, we filed with the Secretary of State of the State of Delaware a Certificate
of Amendment to our Certificate of Incorporation (the “Certificate Amendment”). The Certificate Amendment amended and
restated our Certificate of Incorporation (the “Charter”) to, among other things:
● effect the Reverse Stock Split;
● after giving effect to the Reverse Stock Split, decrease the number of authorized shares of common stock available for issuance from 95,000,000 to 50,000,000 and increase the number of authorized shares of preferred stock available for issuance from 5,000,000 to 10,000,000;
● authorize the Board of Directors (“Board”) to increase or decrease the number of shares of any series of our capital stock, provided that such increase or decrease does not exceed the number of authorized shares or be less than the number of shares then outstanding;
● authorize the Board to issue new series of preferred stock without approval of the holders of common stock or other series of preferred stock, with such powers, preferences and rights as may be determined by the Board;
● authorize a majority of the Board to fix the number of our directors;
● indemnify the members of the Board to the fullest extent permitted by law;
● remove the classification of the Board to require all directors to be elected annually;
● provide that special meetings of our stockholders may only be called by the Board, the chairman of the Board or our chief executive officer;
● provide that no stockholder will be permitted cumulative voting at any election of directors;
● elect not to be governed by Section 203 of the Delaware General Corporation Law (the “DGCL”);
● elect the Court of Chancery of the State of Delaware to be the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers or other employees, any action under the DGCL, our Charter or bylaws or any actions governed by the internal affairs doctrine; and
● require the vote of at least two-thirds of the voting power of the then outstanding shares of our capital stock to amend or repeal certain provisions of our Charter. The Reverse Stock
Split became effective as of 5:00 p.m. Eastern Time on February 13, 2018, and our common stock began trading on a split-adjusted
basis when the market opened on February 14, 2018. Upon the effectiveness of the Reverse Stock Split, every 12 shares of our issued
and outstanding common stock automatically converted into one share of common stock, without any change in the par value per share.
In addition, a proportionate adjustment was made to the per share exercise or conversion price and the number of shares issuable
upon the exercise of all of our outstanding stock options and convertible securities to purchase shares of common stock and the
number of shares underlying restricted stock awards and reserved for issuance pursuant to our equity incentive compensation plan.
Any fraction of a share of common stock that would otherwise have resulted from the Reverse Stock Split was rounded down to the
nearest whole share. All share and per share amounts have been retroactively restated to reflect the Reverse Stock Split. Private Placement SPA On February 14,
2018, we entered into a Securities Purchase Agreement (the “Private Placement SPA”) with the Investors pursuant to
which the Investors purchased from us an aggregate of 945,819 shares of our common stock, at a price of $7.20 per share, for aggregate
proceeds of $6.8 million. Investor Rights Agreement Effective February
14, 2018, we entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Holders. Under the
Investor Rights Agreement, the Investors are permitted to nominate a majority of our directors and designate the chairperson of
the Board at subsequent annual meetings, as long as the Investors maintain an ownership threshold in the Company of at least 40%
of our then outstanding common stock (the “Ownership Threshold”). If the Investors are unable to maintain the Ownership
Threshold, the Investor Rights Agreement contemplates a reduction of nomination rights commensurate with their ownership interests. For so long as
the Ownership Threshold is met, we must obtain the approval of the Investors to proceed with the following actions: (i) issue new
securities; (ii) incur over $0.25 million of debt in a fiscal year; (iii) sell or transfer over $0.25 million of our assets or
businesses or our subsidiaries in a fiscal year; (iv) acquire over $0.25 million of assets or properties in a fiscal year; (v)
make capital expenditures over $0.125 million individually, or $1.5 million in the aggregate during a fiscal year; (vi) approve
our annual budget; (vii) hire or terminate our chief executive officer; (viii) appoint or remove the chairperson of the Board;
and (ix) make, loans to, investments in, or purchase, or permit any subsidiary to purchase, any stock or other securities in another
entity in excess of $0.25 million in a fiscal year. As long as the Ownership Threshold is met, we may not increase the size of
the Board beyond seven directors without the approval of a majority of the directors nominated by the Investors. The Investor Rights
Agreement grants the Holders the right to purchase from us a pro rata amount of any new securities that we may propose to issue
and sell. The Investor Rights Agreement may be terminated (a) upon the mutual written agreement of all the parties, (b) upon written
notice of the Company or an Investor, if such Investor’s ownership percentage of our then outstanding common stock is less
than 10%, or (c) upon written notice by the Investors. PWPI and PWIMF’s right to purchase from us a pro rata amount of any
new securities will also terminate at such time as their aggregate ownership percentage of our then outstanding common stock is
less than 8.5%. Registration Rights Agreement Effective February
14, 2018, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Holders. The
Registration Rights Agreement requires us to, among other things, file with the U. S. Securities and Exchange Commission (“SEC”)
a shelf registration statement within 90 days of the date of the Registration Rights Agreement covering the resale, from time to
time, of our common stock issued. This registration statement became effective on June 4, 2018. Second Amended and Restated Bylaws On February 14,
2018, we amended and restated our current bylaws by adopting the Second Amended and Restated Bylaws of the Company (the “Amended
Bylaws”). The Amended Bylaws amended our existing bylaws to, among other things:
● provide for annual and special meetings of stockholders to be held through remote communications;
● provide for the election of any directors not elected at an annual meeting of stockholders to be elected at a special meeting of stockholders;
● declassify the Board into one group of directors that will hold office until the subsequent annual meeting of stockholders and until the election and qualification of such directors’ respective successors;
● provide for the filling of a new directorship or director vacancy by the affirmative vote of the holders of a majority of the voting power of our shares of stock;
● allow for a majority of the Board present to adjourn a Board meeting if a quorum is not met;
● unless otherwise restricted in the Amended Bylaws or our Charter, provide the Board with the authority to fix the compensation of directors, including without limitation, compensation for services as members of Board committees;
● allow us to enter into an agreement with a stockholder to restrict the transfer of shares held by such stockholder in any manner not prohibited by the DGCL; and
● allow the Board to declare dividends on our capital stock, subject to any provisions of our Charter and applicable law. Concentrations and Credit Risk The Company’s
accounts receivables are from a variety of health care organizations and distributors throughout the world. No single customer
accounted for more than 10% of revenue or accounts receivable in the fiscal years 2018 or 2017. The Company provides for uncollectible
amounts when specific credit issues arise. Management believes that all significant credit risks have been identified at December
31, 2018. Use of Estimates The preparation
of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Significant estimates include the carrying amount of property
and equipment (including surgical instruments), goodwill, and intangible assets and liabilities; valuation allowances for trade
receivables, inventory valuation, and deferred income tax assets and liabilities; valuation of the warrant derivative liability;
inventory and estimates for the fair value of stock options grants and other equity awards upon which the Company determines stock-based
compensation expense. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers
all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. Cash equivalents
are recorded at cost, which approximates market value. At times the Company maintains deposits in financial institutions in excess
of federally insured limits. Trade Accounts Receivable Accounts receivable
represents amounts due from customers for which revenue has been recognized. Normal terms on trade accounts receivable are net
30 days and some customers are offered discounts for early pay. The Company performs credit evaluations when considered necessary,
but generally does not require collateral to extend credit. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing
receivables. The Company determines the allowance based on factors such as historical collection experience, customer’s current
creditworthiness, customer concentration, age of accounts receivable balance, general economic conditions that may affect a customer’s
ability to pay, and management judgment. Actual customer collections could differ from estimates. Account balances are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions
to the allowance for doubtful accounts are charged to expense. The Company does not have any off-balance sheet credit exposure
related to its customers. Inventories Inventories are
stated at the lower of cost or net realizable value. Cost is determined using the specific identification method and includes materials,
labor and overhead. The Company calculates an inventory reserve for estimated obsolescence and excess inventory based on historical
usage and sales, as well as assumptions about future demand for its products. These estimates for excess and obsolete inventory
are reviewed and updated on a quarterly basis. Increases in the inventory reserves result in a corresponding expense, which is
recorded to cost of sales. Property and Equipment Property and equipment
are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, generally three to seven years for computers and equipment and five years for surgical instruments. Leasehold
improvements are depreciated over the shorter of their estimated useful life or the remaining term of the lease. Repairs and maintenance
are expensed as incurred. Intangible Assets Intangible assets
with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed
for impairment whenever events or circumstances indicate their carrying amount may not be recoverable. Intangible assets include
trademarks and patents and include costs to acquire and protect Company patents. Intangible assets are carried at cost less accumulated
amortization. The Company amortizes these assets on a straight-line basis over their estimated useful lives. In 2015 with the
acquisition of X-spine, the Company established a fair value for the technology, tradenames and intangible assets which was determined
based upon a “relief from royalty” approach. The amortization of these assets is consistent with the valuation method
used to establish their fair value which in turn was based on the assets’ future cash flow. Other Assets Other Assets consist
of the short-term and the long-term portion of prepaid expenses and security deposits. Long-Lived Assets Long-lived assets,
including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair
value of the assets. Goodwill Goodwill represents
the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business
combination and determined to have indefinite useful lives are not amortized, instead they are tested for impairment at least annually
and whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. The Company conducts its
impairment test on an annual basis and will review the analysis assumptions on a quarterly basis. We test goodwill for impairment
at the reporting unit level, which is an operating segment or one level below an operating segment, referred to as a component.
A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of that component. Revenue Recognition The Company adopted
the provisions of Accounting Standards Update (“ASU”) No. 2014-09, Topic 606, Revenue from Contracts with Customers Adoption Impact Given that our
revenue recognition has remained generally the same as in prior years, the Company has elected the modified retrospective method
of adoption. On January 1, 2018, we analyzed contracts that were not completed as of adoption date. The cumulative effect
of initially applying ASC 606 would have been an adjustment to decrease the opening balance of retained earnings by $24 thousand
as of January 1, 2018. Due to the amount being de minimis, no adjustment was recorded. In addition, the Company determined that
there is a de minimis difference in 2018 revenues under ASC 606 versus the previous guidance. Disaggregation of Revenue The Company operates
in one reportable segment with our net revenue derived primarily from the sale of orthobiologics and spinal implant products across
North America, Europe, Asia Pacific and Latin America. Sales are reported net of returns. No rebates, group purchasing organization
fees or other customer allowances are present, and so are not relevant to net revenue determination. The following table presents
revenues from these product lines for the year ended December 31, 2018:
Year-Ended Percentage of
December 31, 2018 Total Revenue
Orthobiologics $ 48,984 68 %
Spinal implant 22,830 31 %
Other revenue 389 1 %
Total revenue $ 72,203 100 % In the United States,
we generate most of our revenue from independent commissioned sales agents. We consign our orthobiologics products to hospitals
and consign or loan our spinal implant sets to the independent sales agents. The spinal implant sets typically contain the instruments,
disposables, and spinal implants required to complete a surgery. Consigned sets are managed by the sales agent to service hospitals
that are high volume users for multiple procedures. We ship replacement inventory to independent sales agents to replace the consigned
inventory used in surgeries. Loaned sets are returned to the Company’s distribution center, replenished, and made available
to sales agents for the next surgical procedure. For each surgical
procedure, the sales agent reports use of the product by the hospital and, as soon as practicable thereafter, ensures that the
hospital provides a purchase order to the Company. Upon receipt of the hospital purchase order, the Company invoices the hospital
and revenue is recognized. Additionally, the
Company sells product directly to domestic and international stocking resellers and private label resellers. Upon receipt and acceptance
of a purchase order from a stocking reseller, the Company ships product and invoices the reseller. We recognize revenue when the
products are shipped, and the transfer of title and risk of loss occurs. There is generally no customer acceptance or other condition
that prevents us from recognizing revenue in accordance with the delivery terms for these sales transactions. The following table
presents revenues from these sales channels for the year-ended December 31, 2018 (in thousands):
Year-Ended Percentage of
December 31, 2018 Total Revenue
Independent agents $ 63,063 87 %
Direct sales 8,751 12 %
Other revenue 389 1 %
Total revenue $ 72,203 100 % Performance Obligations The Company’s
contracts do not include a right of acceptance or a right to cancel, therefore our process for recognizing revenue does not require
an evaluation of whether acceptance is received or a right to cancel has expired. Further, the Company does not incur upfront costs
or exclusivity fees in conjunction with entering into a customer contract. The Company’s customer contracts do not provide
for percentage of completion performance measures or contingent consideration. In the normal course
of business, the Company accepts returns of product that have not been implanted. Product returns are not material to the Company’s
consolidated statements of operations. The Company accounts for shipping and handling activities as a fulfillment cost rather than
a separate performance obligation. The Company’s policy is to record revenue net of any applicable sales, use, or excise
taxes. Payment terms are generally net 30 days from invoice date and some customers are offered discounts for early pay. Contract Assets and Liabilities The Company does
not have deferred or unearned revenue arrangements with its customers that would give rise to contract liabilities. The Company
recognizes sales commissions as incurred because the amortization period is less than one year. Additionally, the Company does
not recognize unbilled receivables or progress payments to be billed that would result in a contract asset. All pricing and agreements
are completed based on the contracted individual unit price; no other methods of determining price are allowed within the Company’s
sales agreements. Therefore, no contract assets or contract liabilities are recorded in our consolidated balance sheets as of December
31, 2018. Research and Development Research and development
costs, which are principally related to internal costs for the development of new products are expensed as incurred. Net Loss Per Share Basic net loss per
share is computed by dividing net loss by the weighted average number of common shares outstanding. Shares issued during the period
and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted net loss
per share is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive
common shares outstanding during the period, which include the assumed exercise of stock options and warrants using the treasury
stock method. Diluted net loss per share was the same as basic net loss per share for the years ended December 31, 2018 and 2017,
as shares issuable upon the exercise of stock options and warrants were anti-dilutive as a result of the net losses incurred for
those periods. Dilutive loss per share are not reported as their effects of including 2,207,567 and 587,382 outstanding stock options
and warrants for the years ended December 31, 2018 and 2017, respectively, are anti-dilutive. Fair Value of Financial Instruments The carrying values
of financial instruments, including trade accounts receivable, accounts payable, accrued liabilities and long-term debt, approximate
their fair values based on terms and related interest rates. The Company follows
a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy
are described below: Level 1: Inputs to the valuation
methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Inputs
to the valuation methodology are unobservable and significant to the fair value measurement. A financial instrument’s
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
During the years ended December 31, 2018 and 2017, there was no reclassification in financial assets or liabilities between Level
1, 2 or 3 categories. The following table
sets forth by level, within the fair value hierarchy, our liabilities as of December 31, 2018 and 2017 that are measured at fair
value on a recurring basis (in thousands): Warrant derivative liability
As of December 31, 2018 As of December 31, 2017
Level 1 - -
Level 2 - -
Level 3 $ 10 $ 131 The valuation technique
used to measure fair value of the warrant liability is based on a lattice valuation model and significant assumptions and inputs
determined by us (See Note 8, “Warrants” below). Level 3 Changes The following is
a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the years ended December 31, 2018 and 2017 (in thousands): Warrant derivative liability
Balance at January 1, 2017 $ 334
Gain recognized in earnings (203 )
Balance at January 1, 2018 $ 131
Gain recognized in earnings (121 )
Balance at December 31, 2018 $ 10 During the year
ended December 31, 2018, the Company did not change any of the valuation techniques used to measure its liabilities at fair value. Recent Accounting Pronouncements In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842), We will adopt this
ASU on January 1, 2019 using the modified retrospective approach and will not restate comparative periods. We are substantially
complete with our implementation plan. We plan to elect the transition package of three practical expedients permitted within the
standard. In accordance with the package of practical expedients, we will not reassess initial direct costs, lease classification,
or whether our contracts contain or are leases. Based on our lease portfolio as of December 31, 2018, we plan to recognize an operating
lease liability and related right-of-use asset on our balance sheet of approximately $3.0 million, which represents the present
value of our future minimum lease payments related to operating leases. We do not anticipate material changes to our consolidated
statement of operations or our consolidated statement of cash flows. In June 2016, the
FASB issued ASU 2016-13, Financial Instruments - Credit losses: Measurement of Credit Losses on Financial Instruments Financial Instruments-Credit Loss In June 2018, the
FASB issued ASU No. 2018-07, Stock Compensation (Topic 718), In August 2018,
the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Reclassification Certain prior year amounts have been
reclassified to conform with current year presentation. |
